I started this blog in June 2007 asking these questions: Are we in a massive asset bubble that will blow up in our faces ??? - ANSWERED YES ! Is western and particularly British society on the verge of social collapse??? What are the best common sense long term investment strategies to keep you rich? When will consumption/debt bubble economics end and a real savings/production economy begin ???
Friday, 10 October 2008
Well, someone did at the bottom of the last bear market - and the unusual conditions that prompted that call have recently recurred. So have we just seen the low point of the current turmoil, and is now the time to pile back into equities?
The clever stock-watchers who got it right last time, in March 2003, reasoned that equities had become too cheap when they spotted that the income produced by investing in shares - the "yield" - had overtaken the returns from government bonds.
Why is this unusual? Bonds pay a fixed rate of return and have relatively little scope for capital growth compared with shares. Those who buy shares, by contrast, expect the income to rise over the years (along with the share price itself) and can therefore be content with a lower initial return. So to buy shares and immediately get a better income than from bonds sounds like a great deal.
Investors in 2003 agreed. They calculated that if shares had fallen far enough to push the yield so high, they had fallen too far and were clearly undervalued. The stock market started to rise, ushering in a bull market that ended only with the arrival of the credit crisis last year.
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